Question

2. If the Trade Weighted Euro strengthens significantly over time, it is likely that *

1 point

a. There will be less imported inflation for the US.

b. There will be less imported inflation for Europe.

c. The European Central Bank will raise short term interest rates.

d. The European Central Bank will raise long term interest rates.

Answer 1

Answer) b. There will be less imported inflation for Europe.

REASON

If trade weighted Euro strengthens ,it means that EUR is appreciated against USD.

The appreciation in Euro can be caused by decrease in Interest Rates by European Central Bank or decrease in inflation.

Since EURO will appreciate, imports will become cheaper as more value of goods can be bought with same units of EUR. This results in less import inflation.

Option a) is incorrect as import inflation in USA will increase . This is because goods purchased by USA will become more expensive since EUR has appreciated and more units of US dollar will be required to buy EUR denominated goods/services.

Option c) is incorrect because raising short term interest rates will cause trade weighted EUR to depreciate.

Option d) is incorrect because raising long term interest rates will cause trade weighted EUR to depreciate.